Pan Pacific International Holdings Corp

TSE:7532

Earnings Call Transcript 2018-Q3

[Mitsuo Takahashi, executive]

Good afternoon, ladies and gentlemen. I am Mitsuo Takahashi, CFO at Don Quijote Holdings. Thank you for joining us. I would like to give you a presentation regarding the overview of the third quarter results for fiscal year ending June 2018 based on the handout. Same slides are shown on the front screen.

Let me begin with Page 3. This is exactly a summary that shows you the overview comment on our consolidated results for the first 9 months period. Let me elaborate on one by one.

The point is that our major policy is to execute aggressive management strategies. We focused on overwhelming other retailers by winning price wars right in front of us. The reason why we were able to do that was we outweigh others within each commercial area. By localizing each of our stores thoroughly, we are successfully expanding the market share.

Our overseas business made a progress. We delivered strong sales at co-branded stores with Uny, which is post-GMS format. As a result, we delivered a record-high sales and profit.

I would like to highlight 5 points. Firstly, consumption environment that surrounds us sees positive signs lately. However, [ viewer ] consumption has been stagnant. Consumers are price conscious. We see difficult situations in consumer behaviors and sales promotion measures at competitors.

We were able to make the right product portfolio that meet customers' needs. We executed fine key pricing strategies. As a result, we exceeded a high bar of last year, marking a 4.5% same-store sales growth at Don Quijote, 2.1 points came from tax-free sales for overseas travelers and 2.4 points came from domestic sales growth. Nagasakiya had 2.7% of same-store sales growth. Those results outnumbered other retailers.

Moving on to the second point. We delivered strong sales momentum for tax-free sales for overseas travelers. Sales for consumables, such as cosmetics and pharmaceutical products, grew rapidly. We had high proportion of frequent repeat customers by enhancing the brand awareness and presence through social media or word of mouth.

Tax-free sales for the first 9-month period were JPY 40.6 billion, up 56.7% year-over-year. It is likely to top JPY 50 billion tax-free sales for full year, which is best -- which is the best-in-class in the retail industry. This tax-free sales contribution to the total stood at 8.3% for 9 months.

Third point is well-controlled expenses. In SG&A, initial costs and operation cost increased associated with 20 new stores and newly consolidated company called QSI. The productivity was successfully improved under the circumstances where there is wage inflation by streamlining our operation.

Meanwhile, SG&A as a percentage of sales was 20.0%, down by 0.4 percentage points on a consolidated basis by expanding market share in each commercial area as well as increasing the total sales significantly. If we exclude the impact from QSI, SG&A would have been 19.8%, down by 0.6 percentage points year-on-year.

Moving on to the fourth point. 6 double-name stores with Uny made fantastic debut. Those stores are making the best use of advantages that both Uny and Don Quijote are proud of. For the time being, we would like to deepen our cooperation and overcome challenges by improving the performances at those 6 stores.

Fifth point is our business environment for Q3 3-month period from January to March. External environment is heading to improvement while seesawing. Consumer mindset is difficult as consumers are being price conscious. Also, temperature fluctuation and bad weather gave a negative impact on Q3 results. Under these circumstances, we were competitive even more for our product assortment and pricing for daily necessity and we expanded customer wallet share.

For inbound tourist consumption, monthly tax-free sales hit an all-time high, and we have stronger sales momentum. As a result, for the accumulated Q3 period is shown -- as it is shown on Page 4, the sales and profit increased significantly year-over-year. For net profit, extraordinary profit was posted last year worth JPY 10.9 billion, which went up by 0.7%. We secured, still, substantial amount of net profit.

Moving on to the guidance. We made upward revision given the strong results until third quarter. It's third time for the guidance revision next to February and November last year. The details are shown on the front screen. 2 more months will come for this fiscal year. For fourth quarter, without satisfying the current business growth, we are trying to create a new retail for the 29th year of consecutive growth.

Next page, to Page 5 to 6. This is the overview of the third quarter results. For SG&A, let me give an explanation for the special factors for rent increase because store properties are getting big and the consolidation of the QSI, those factors pushed the rent up. For commission payment, also increased because of the advisory expense for QSI when acquiring, which is -- which was JPY 640 million. That was one-off expenses. And we also increased the credit card commission worth JPY 410 million because we had higher proportion of credit card payment.

Next page. This is the breakdown by product category. The sales trend, the [ RSOs ] was led by daily necessities, including the miscellaneous goods and food that was very strong. However, the watches and fashion and sporting and leisure goods had lower growth rate, reflecting the stagnant consumer mindset and bad weather. For overseas business, sales increased significantly because of the consolidation of QSI and new store opening in Singapore.

Please look at Page 9 and 10. This is balance sheet. The total assets stood at JPY 797.4 billion. The merchandise increased by JPY 13.2 billion and fixed asset stood at JPY 20.7 billion and long-term loan was JPY 74 billion. And the fixed asset total stood at JPY 131 billion, and our cash and deposit decreased by JPY 1.8 billion.

Page 10. It stood at JPY 492.2 billion. The major reasons are the JPY 7.5 billion of increase in account payables, JPY 128.1 billion increase for interest-bearing debt and net asset stood at JPY 305.2 billion. And the major breakdowns are interest-bearing debt, JPY 314.3 billion, and net liabilities at JPY 239.8 billion. Net D/E stood at 0.79x; ROE, 13.5% on annualized basis; and the equity ratio stood at 35.6%.

On to the -- Page 11. This is segment information by business. Each segment are making this stable growth for accretive. Last year, it was included, but this year, it's not included.

Page 12. It's the cash flow and CapEx. For this year, investment cash flow increased very much. This is because of the acquisition of the property worth JPY 31.8 billion. Acquisition of the share of affiliate was JPY 16.3 billion and acquisition for affiliate stood at JPY 20 billion and the loans to loan was JPY 77.7 billion. And the CapEx was JPY 34.5 billion, which is the same level last year.

Moving on to Page 13 and 14. This slide shows the new store opening. For this third quarter, we opened 20 stores, including 1 store in Singapore, which was our very first store there. As a group, Hawaiian supermarket chain called QSI, their 24 stores are added to our store count. That sums up our total store count in Q3, was 408. There are 6 double-name stores, co-worked with Uny. For this fiscal year, 31 new stores will be opened for this full year basis.

Page 15. This is the Q3 review. Please confirm the comment and graph that shows the temperature fluctuation.

Page 16. It's the trend for monthly same-store sales. The same-store sales increased for 15 consecutive quarters, which is 45 months.

Page 17 and Page 18. This is the profit loss statement for Q3 period. For third quarter, we delivered strong sales -- the increase in sales and operating profit.

Next, Page 19. The slide title is the breakdown of third quarter results. There are some graphs. Let me add some comment. Please look at the graph on right top. This is the breakdown analysis for the increase for SG&A.

Don Quijote new store, Nagasakiya. Nagasakiya opened 2 new stores and overseas business are the reasons for increase on SG&A. On the other hand, the existing store added Don Quijote and back office section that is included in others are decreased SG&A year-over-year.

Please take a look at the graph on left down. At the Don Quijote existing store, the sales momentum were very strong, while inventory for watches and fashion are a little bit excessive. For example, please take a look at the graph on right down. The asset turnover is slightly improving compared to the third quarter last year. Still, we regarded that our inventory is still above our optimal level. We would like to control inventory level more appropriately.

Page 20. This slide shows the results for March and April for 6 double-name stores. Sales were 220% more than when -- more when those stores are former Uny brand, and customer traffic were 190% and gross profit were 175%. You can easily see that the change of the product category are strong sales at 6 double-name stores are led by nonfood items, for which Don Quijote is good at. Food and processed food grew significantly.

Page 21 and 22. As the situation for tax-free sales were inbound consumption, we delivered a strong momentum. Please take a look at the trend graph here.

Page 23 and 24. This page shows our ESG work.

Please also take a look at the Page 25 to Page 26. This is our message to capital market. Please take a look later on when you have time. We have some slide just on the screen. This is the framework for the improvement of corporate value. Let me elaborate on this.

We have about 450 meetings with domestic and overseas analysts. And in that meetings, we have robust discussions with them. Honestly speaking, some investors and analysts are too much focused on the very short-term results and sometimes, they don't understand about our real capability or real strength at Don Quijote.

First slide is like this. This slide shows that -- our value-creation cycle and how we will grow going forward for a very long time. This slide is to promote your better understanding.

Don Quijote opened its first store in 1989. Since then, we have been increasing sales and operating profit for 28 years. We made rapid growth over the past 28 years, and store counts and customer base were rapidly expanded because we implemented the policy to prioritize the customers' needs.

The left-hand side shows our key strength. For example, delegation of authority or the -- each store -- individual store operation, which cannot be copied by others. The middle 3 factors, including delegation of authority or flexible compensation system. This is our capability and strength. And those key strengths that linked each other, and that would improve our flexibility to changes. That's how we operate our business day to day.

Our concept is to offer surprising price and offer attractive store, heart-pounding, exciting shopping experience, to have more spot excessive inventories or have -- we'll make our stores very exciting so that we can attract more customers and to be more efficient.

We are improving our cash conversion cycle, and we focus ESG management and also leverage management. We have -- we enjoy higher return with lower capital. We will maintain the capital surplus. So going forward, for a very long time, we will grow further.

Next slide shows the factors for the improvement of corporate value. There are 4 factors: one, to realize the high sales growth; two, to achieve the high profit margin; three is to get higher sales with small capital; four is to reduce business risk. The -- over the past 5 years, we have been increasing our growth by 10%. Well, that can be described as NOPAT margin. Third can be described as ROIC, and fourth can be measured as WACC, means weighted average cost of capital.

Next slide. Our sales growth was 9.4% over the past 5 years. For high margin, which is NOPAT margin, the expectation is 3.8% focused for this year. And the sales ratio to invested capital is 63.8%. And ROIC can be calculated to 6%. And 6% of ROIC, if we divide this number by WACC, weighted average cost of capital, which is 3% -- if we divide 6% with 3%, double the corporate value-creation capability can be measured.

We have -- our capability to create corporate value is 2x. So going forward as well, we leverage the procured fund and invested in our main business so that we can enjoy high return. So I would like to ask investors to look at the things for long-term period of time.

Please take a look at the Page 26 and Page 27. On Page 27, for the guidance, as it is shown on Page 18, sales, recurring profit and net profit revised upward. Please take a look at the details on this slide.

Page 29 is the results overview for the Japan asset marketing for March 2018 period.

Thank you very much for your kind attention.